Going Long Consumer Staples
We are hosting our 1H22 Consumer Staples Themes call today at 2:30 PM ET. We will outline our thesis for going long or overweighting the Consumer Staples sector.
Hedgeye’s Macro team is calling for either Quad 1 or shallow Quad 4 in Q1, followed by an increasing likelihood of Quad 4 in Q2. Consumer Staples has the highest expected value of any sector in Quad 4. However, not all companies will enter Quad 4 with the same outlooks.
We see an inflection in margins ahead for the sector. Cost increases have become increasingly larger headwinds for margins in Consumer Staples. CPG companies are experiencing cost increases for everything from labor, to packaging, to food ingredients, to transportation. Peaks are generally processes, not points. Since food at home is a relatively small portion of CPI, we can have peak inflation while food prices continue to make new highs. Food manufacturing costs are peaking while price increases are accelerating, signaling strengthening margins ahead.
We reshuffled our position monitor to account for international sales mix, exposure by commodity, pricing plans, the elasticity of demand, margin outlook, competitive dynamics, and secular growth trends. We added General Mills, Keurig Dr Pepper, and Pilgrim’s Pride to the long list. For our short list we added Anheuser Busch InBev and removed J.M. Smucker and Conagra.
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CLICK HERE for the live webcast and materials at the time of the event. |
Acquiring RTD production (VWE)
Vintage Wine Estates announced the acquisition of Meier’s Wine Cellars. Meier’s had revenue of $18M in 2021. The purchase price was valued at 8x Meier’s 2021 EBITDA. Vintage Wine Estates has had a longstanding relationship with Meier’s and has been a spirits client for many years. Vintage Wine Estates sees upside in Meier’s RTD wine and beverage alcohol production and plans to produce out of Meier’s facility. Vintage Wine Estates expects to extract savings from the transportation and distribution of its recent ACE Cider acquisition to the East. The purchase valuation was at 8x, but with the synergies Vintage Wine Estates will extract we expect it to be in the 4-6x range. The company has wasted no time making acquisitions since going public as can be seen in the timeline below.
